The Bank of England is set to announce its decision on interest rates today. Many analysts are predicting that the benchmark, which is currently at 4.75%, will remain at its current level. This comes after inflation increased for the second consecutive month, reaching 2.6%. This figure places it further above the target of 2% set by the Bank.
In November, Governor Andrew Bailey had said that there was likely to be a gradual downward path for rates. The Bank uses interest rates to control inflation, which measures the overall pace of rising prices. By making borrowing more expensive, people have less money to spend, thus encouraging saving and reducing demand for goods, ultimately slowing the rate of overall price rises.
However, increasing borrowing costs can risk harming the economy since it can become more difficult for businesses to borrow, perform well, and create jobs. Therefore, the Bank’s Monetary Policy Committee (MPC) must perform a balancing act to ensure that the economy is not harmed.
The MPC cut interest rates from 5% to 4.75% in November, marking the second reduction in 2020. Despite this, rising prices, combined with faster growth in wages, indicate that the central bank may need to maintain interest rates at their existing level for a longer period. This indicates that there is minimal possibility of the Bank delivering an early Christmas present with another interest rate cut.
In the meantime, the Bank’s base interest rate greatly affects the rates that High Street banks and other money lenders provide customers with loans and credit cards. Most lenders make decisions on their interest rates by pricing in the impact of a base rate hold or cut. Nonetheless, the average two-year fixed mortgage rate is presently 5.04%, according to financial information firm Moneyfacts. Meanwhile, a five-year deal has an average rate of 4.14%
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